In 2016, the tax authorities made a discretionary assessment of EET Group’s taxable income for 2010-2012, in which they increased the income by a total of DKK 128,810,000. The increase was based on the fact that EET Group had not acted at arm’s length in relation to a number of foreign sales companies, which had been overcompensated for their limited risk distribution activities.
By decision of 28 October 2020, the National Tax Tribunal reduced the assessment of additional taxable income to DKK 29,587,135.
The tax authorities appealed against this decision.
Judgment
The Court of Appeal found that EET Group A/S had rightly used a comparison of the sales companies’ gross profits in relation to the comparable companies selected by the company as the basis for their arm’s length analysis, and that the company’s transfer pricing documentation was not otherwise deficient to such an extent that it could be equated with missing documentation. EET Group A/S’ taxable income in the tax years 2010-2012 could therefore not be assessed on a discretionary basis pursuant to section 3 B(8), cf. section 5(3), of the current Tax Control Act.
After an overall assessment, the Court also found no basis for setting aside the National Tax Tribunal’s assessment that the arm’s length intervals in this case could not constitute the full intervals for the comparable companies’ key figures, but should be narrowed down to the interquartile intervals. The High Court also found no basis for setting aside the National Tax Tribunal’s judgment according to which the income of the sales companies whose gross margin was outside the interquartile ranges for the individual income years 2010, 2011 and 2012 should be adjusted to the closest point in the arm’s length interval, i.e. to the third quartile.
Accordingly, and as the High Court did not find any other basis for setting aside the National Tax Tribunal’s discretionary assessment of the income, the Court agreed that the income assessment for the income years in question was as determined by the National Tax Tribunal.
The judgment has later been appealed to the Supreme Court by the Ministry of Taxation.
Excerpt in English
“The question is then whether the Ministry of Taxation has demonstrated that EET Group’s transactions with the sales companies were not at arm’s length.
In support of this, the Ministry of Taxation has in particular stated that EET Group has used a transfer pricing method which is not one of the five methods recognised in the OECD Transfer Pricing Guidelines. The Ministry of Taxation has furthermore stated that EET Group has not acted on arm’s length terms when the sales companies’ earnings fall outside the interquartile range.
For the reasons stated by the National Tax Tribunal, the Court of Appeal accepts that EET Group in its transfer pricing documentation has rightly used a comparison of the sales companies’ gross margins in relation to the comparable companies selected by the company as the basis for the arm’s length analysis. The Court of Appeal has also emphasised that the company sets its prices according to a cost plus method, which is based on gross profit, and that the company’s gross profitbased test method therefore ensures a higher degree of proximity to the transactions than the TNM method used by the tax authorities, which is based on net profit, see Transfer Pricing Guidelines 2010, section 2.10. The fact that EET Group itself states in the transfer pricing documentation that a comparison is made according to the TNM method cannot lead to a different assessment.
Even if the reference to the TNM method cannot be considered correct, the actual method used is thus stated in the transfer pricing documentation.
As regards the applied arm’s length intervals, the Court of Appeal finds, after an overall assessment, no basis for setting aside the National Tax Tribunal’s assessment that the intervals in this case cannot constitute the full intervals for the comparable companies’ key figures, but must be narrowed down to the interquartile ranges, see Transfer Pricing Guidelines 2010, paragraph 3.57.
In particular, the Court of Appeal emphasised that the database studies carried out contained certain comparability defects, e.g. because in 2010 and 2011 comparisons were made with companies with inventories of between 5 and 25% of turnover and intangible assets of up to 5% of turnover, even though most of the sales companies had no inventories, and even though none of the sales companies had booked intangible assets. The Court of Appeal also emphasised that in 2012, without further explanation, the selection criteria were changed, and that this meant that none of the companies that were comparable in 2010 and 2011 were comparable in 2012. Under these circumstances, the information provided by EET Group, including the statements from Professor Mogens Steffensen and appraiser Søren Feodor Nielsen, cannot lead to a different result.
Finally, the Court of Appeal finds no basis for setting aside the National Tax Tribunal’s assessment according to which the income of the sales companies whose gross margin lies outside the interquartile ranges for the individual income years 2010, 2011 and 2012 must be adjusted to the closest point in the arm’s length interval, i.e. to the third quartile. What the Ministry of Taxation has argued before the Court of Appeal regarding this element of the National Tax Tribunal’s decision cannot lead to a different result.
Accordingly, and as the Court of Appeal finds no other basis for setting aside the discretionary assessment of the income by the National Tax Tribunal, the Court of Appeal accepts that the income assessment for the income years in question is as determined by the National Tax Tribunal.”
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